Why should Penn divest from fossil fuels and reinvest in clean energy?

1. Fiduciary Duty﻿

Penn's fiduciary responsibility requires it to avoid the direct financial losses from fossil fuel companies' stranded assets as well as the materialized harms of climate change on all its other holdings.

Pictured: Climate change increases the number of wildfires and the duration of wildfire season; in May 2013, wildfires in Ventura County, CA forced 4,000 residents to evacuate their homes.

Pictured: Pipeline spilling crude oil into a village in Dadabili, Nigeria; Shell understated 2,400% the size of oil spills it caused in Nigeria in order to avoid cleanup and compensation to local farmers and fishermen.

Penn’s continued investments in fossil fuels nullifies any impacts from its Climate Action Plan; however, diverting existing funds towards the underinvested clean energy industry maximizes the social impact of transitioning to a truly sustainable economy.

Pictured: Bear Creek Wind Farm in Pennsylvania produces about 61 GWh of electricity every year. Ceres estimates an additional $44 trillion needs to be invested in clean energy to “limit global warming to 2°C and avoid the worst effects of climate change.”

Additional Facts

1. Fiduciary Duty

1.a. Fiduciary Duty: The purpose of the university endowment is the long-term support for the core university mission. Penn’s Chief Investment Officer Peter Ammon explains that the university endowment should “take a time horizon longer than the vast majority of investors can” [1].

1.b. According to Meinshausen et al in Nature, in order to have an 80% chance of limiting global warming to 2°C, cumulative carbon dioxide emissions from 2000 to 2049 must be constrained to 886 Gt [2]. According to the World Resources Institute's Climate Analysis Indicators Tool 2.0, the world already emitted more than 492 Gt since 2000 [3], leaving only 394 Gt for the world to emit. At the same time, according to the International Energy Agency's World Energy Outlook, "total potential emissions from fossil-fuel reserves" are 2860 Gt [4]. This means86% of fossil fuel reserves are unburnable if we want to avoid the worst catastrophic effects of climate change. If Penn fails to divest, there are two possible scenarios.

1.c. Scenario I: If Penn does not divest and the carbon budget is exceeded, there are two implications.

First, the planet will suffer the very worst climate impacts of global warming past 2°C. The endowment cannot support core university missions if students and professors are physically unable to live on this planet. Moreover, these impacts would decimate Penn’s finances. Using a 3% discount rate for present value (similar discounts are favored by economists like Nordhaus), DARA and the Climate Vulnerable Forum calculate that 2.1% of world GDP would be lost each year by 2030 if climate change goes unchecked [5]. Since the long-term success of Penn’s endowment relies on the success of the overall economy, these economic harms translate directly into financial losses of companies in Penn's endowment portfolio. In fact, the vast majority of companies in the economy are already suffering from climate change. Of the respondents to the Climate Disclosure Project, 77% of S&P 500 companies are exposed to negative financial impacts of climate change [6]. For these companies, extreme weather events were the top climate risk drivers; this financial risk exposure would increase catastrophically if we were to fail the 2°C target. Thus, exceeding the carbon budget would fundamentally destroy Penn’s ability to support its mission.

Second, Penn’s continued investments in the fossil fuel industry would have been directly culpable in actively supporting our failure to meet the carbon budget. Specifically, continued fossil fuel investments mean directly supporting more fossil fuel combustion via 1) capex and extraction that makes it even easier to exceed the carbon budget and 2) intense lobbying and false science promotion to limit climate policies. In this scenario a failure to divest clearly constitutes a violation of Penn’s fiduciary duty of care, by ignoring the holistic impacts of investment decisions on the entire portfolio: fossil fuel companies do not exist in a vacuum and impose negative externalities on all other assets that the endowment holds.

1.d. Scenario II: If Penn does not divest and the carbon budget is not exceeded, there are similarly two implications.

First, in order for the world to stay within the carbon budget, its fossil fuel combustion must have been drastically reduced. NOTE: this scenario does not require any particular technology alternative or policy option to be adopted, only that fossil fuel usage be reduced somehow within the budget. As a result, valuations of fossil fuel companies would be drastically undercut, because their current valuations from business fundamentals are based on the ability of fossil fuel reserves to generate future cash flows. In this scenario with 86% of reserves remaining in the ground, the vast majority of the current value of Penn's fossil fuel assets would evaporate. Moreover, even amidst low oil price, fossil fuel companies continue to wastefully convert shareholder equity into capital expenditure by spending billions of dollars to drill new wells to augment their reserves - further increasing the proportion of stranded assets. In this scenario, the long-term and permanent impact of stranded assets significantly outweighs cyclical fluctuations based on fuel prices.

Second, Penn’s investment decision would have violated its duty of care by incurring direct financial losses. In this scenario, holding onto overvalued fossil fuel assets is unwise from a purely financial perspective.

Carbon capture and storage (CCS) has limited feasibility and success. According to a London School of Economics and Carbon Tracker report, in even the most idealized scenario of CCS project development (requiring a 47,400% increase from the current 8 to 3800 large-scale projects), CCS can only extend the carbon budget by 125 Gt CO2 to 2050 [7]. In this highly idealized case, 83% of fossil fuel reserves will still be unburnable and/or worthless.

Shareholder engagement cannot 1) convert the stranded reserves into cash flows nor 2) change the fundamental business which relies on increasing CAPEX nor 3) return the entirety of capital to current investors through dividends (i.e. commit business suicide). Therefore, shareholder engagement does not solve any of the aforementioned fiduciary duty violations that occur if Penn fails to divest.

Non-combustion usages of fossil fuels: this fact is already included in IEA’s carbon budget analysis based on the final carbon potential of reserves. There is no evidence that proportional demand for these non-combustion industrial uses will significantly increase; moreover, these industrial applications inherently entail additional fossil fuel combustion and fugitive emissions.

1.f. Conclusion: Thus, if we fail to divest now, the university is actively failing to meet its fiduciary duty - regardless of what future state (Scenario I or Scenario II) actually transpires. Just based on purely financial grounds, the university should divest from fosil fuels to fulfill fiduciary duty.

2. Moral Integrity - Leges sine moribus vanae

2.a. The fossil fuel industry spends enormous sums of money on blocking climate action through a combination of scientific misinformation and donations to politicians.Nearly all scientific studies that raise doubts about climate change or its cause are funded by the fossil fuel industry, and their promotion of false research is discordant with a university that prides itself on academic excellence. Further, the
fossil fuel industry promotes its science-denial by trying to buy democracy: it spent $536 million on lobbying and donations on the 112th
Congress alone [1]. Consequently, a climate-denier member Congressperson receives 4 times more in fossil fuel industry contributions than a scientifically-literate Congressperson (average based on 113th Congress data) [2]. The fact that the industry goes to great lengths to block climate action has the potential to sentence present and future generations to a climate unstable world. As students our university should be valuing our future, not contributing to those who want to take it from us for profit.

2.b. The fossil fuel industry contributes to systemic racism by exploiting communities of color worldwide while the profits flow primarily to white upper classes in developed countries. Examples of this misconduct include the contamination of the Black Mesa Navajo reservation in Arizona due to coal extraction, oil spills in Ecuador and Nigeria, and inadequate cleanup responses by companies responsible in each case. These are just a small number of examples of the way that the fossil fuel industry disproportionately pollutes and contaminates communities based on color and class.

2.c. The fossil fuel industry is responsible for the construction of unsafe infrastructure prone to accidents and failures that have tragic consequences. Fossil fuels are moved to markets from extraction primarily via tankers, pipelines, and railroads, and there have been disasters associated with each form of transport. The fuels flammability has caused explosions and fires like the one that took place in Lac-Mégantic, Canada which killed 47 people when an oil train derailed. Problems with pipelines have also been frequent, a recent example being the release of 50,000 gallons of oil into the Yellowstone River in Montana after a pipe rupture. Even when these accidents do not immediately harm people, the carcinogenic chemicals contained in the fuels can cause cancer and other health problems for affected communities.

2.d. The fossil fuel industry’s practices are incompatible with a stable climate. Through continued extraction and investment in the use of fossil fuels, the industry has shown that it is intent on burning far more of its reserves than can be burned safely. To stay below the two degrees warming above pre-industrial levels, which scientists say is necessary to avoid climate catastrophe, 86% of fossil fuel industry reserves must remain in the ground. To avert catastrophe the fossil fuel industry quickly must abandon its plans to extract and burn more than the safe level and we need to apply pressure on them and decision-makers to ensure this happens. Divestment is a wise tactic on and off university campuses to apply pressure.

2.e. The fossil fuel industry willfully destroys nonhuman aspects of our environment. Many natural areas have been perhaps irreversibly altered as result of fossil fuel pollution, extraction, and global warming. In Canada, due to the extraction of Canadian Tar Sands oil an area of Boreal forest larger than Delaware has been cut down - permanently destroying habitat and the species it sustained - and similar examples of harm committed on the natural world exist everywhere. These ecosystems and species should exist because they have intrinsic value as living entities, and so that future generations may benefit from them. The fossil fuel industries’ destruction of the living world is morally impermissible.

2.f. Divestment is a better way to combat the unconscionable conduct of the fossil fuel industry than shareholder engagement. For Penn, shareholder engagement would be an inadequate response due to its low likelihood of success in changing the industry’s conduct. First, such shareholder meetings only occur once a year and Penn would have very little influence in comparison to larger investors; the influence of divestment would be far greater. Second, the long timeframe under which a shareholder activism approach would take would mean that our endowment would be funding fossil fuels for many years before any meaningful mitigation took place, and time is something we have little of to appropriately address the climate crisis. Third, Penn has never successfully initiated shareholder activism with its endowment but has divested from morally unsound practices multiple times including South African Apartheid in the 1980s, the genocide in Darfur in 2006, and HEI Hotels in 2011.

3.a. Social Impact Commitment: Penn is already committed to making a positive impact on climate sustainability through the Climate Action Plan. Thus the question is not “Should Penn do something about climate change?” but rather “How can we maximize our social impact most effectively given our finite resources?”

3.b. Investment in renewables is direly needed and is cost effective for Penn. According to Ceres, an additional $36 trillion must be invested in clean energy by 2050 in order to limit global climate change to 2°C - an average of an additional $1 trillion every year beyond a “business as usual” scenario. To this end, taking funds out of fossil fuels into clean energy minimizes Penn’s risk by not becoming overexposed or underexposed in the energy sector, considering there are only finite funds in endowment. A direct implication of this point is that shareholder resolutions in fossil fuels are incompatible with social impact from clean energy investment - we can’t keep fossil fuel shares while investing more without becoming underexposed in other sectors e.g. tech, consumer retail, etc.

3.c. Shareholder engagement: Every dollar that remains in fossil fuel companies has an opportunity cost of investment in clean energy. Again, the question should be “Is a dollar worth of fossil fuel shareholder votes more effective at transitioning to a clean energy future than a dollar invested in clean energy?” Penn has already demonstrated with its REC purchases (even if they are limited in scope) that financial support of the clean energy industry tangibly benefits the climate; on the other hand, there have been zero instances of Penn initiating (let alone successfully) any shareholder proxies in fossil fuel companies.

3.d. Conclusion: Greenhouse gases are homogenous pollutants, so the climate does not care if an additional molecule of CO2 is emitted on Penn’s campus or emitted as a result of the climate denial and lobbying by fossil fuel companies financed by Penn’s investment office. Thus, divesting from fossil fuels aligns Penn with its existing values and commitments to a livable climate.